namas leveraging private investment

IISD

REPORT

Financing Nationally

Appropriate Mitigation

Actions (NAMAs):

Leveraging private investment

Avet Khachatryan

with contributions from Jason Dion,

Dave Sawyer, Melissa Harris and Deborah Murphy

June 2014

© 2014 The International Institute for Sustainable Development Published by the International Institute for Sustainable Development.

International Institute for Sustainable Development

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Financing Nationally Appropriate Mitigation Actions (NAMAs): Leveraging private investment

June 2014

Executive Summary

Developing countries have increasingly taken transformative actions to tackle climate change by increasing the generation of clean energy, improving energy eiciency, reducing greenhouse gas (GHG) emissions from transport and waste and other measures. Nationally Appropriate Mitigation Action (NAMA) mechanisms aim to help developing countries reduce GHG emissions and to facilitate low-carbon development in those countries. NAMAs are an important climate mitigation mechanism because of their potential to transform sectors and economies. Considering the growing number of countries adopting NAMAs, and the scale of these initiatives, sustainable long-term funding of NAMAs is an important issue. Organisation for Economic Co-operation and Development countries have pledged to provide US$100 billion per year for developing countries by 2020. Yet it is estimated that mitigation eforts in developing countries will require up to US$300 billion per year by 2020. In light of potentially insuicient public funding, the private sector has played an increasingly important role in global climate inance. This paper discusses various aspects of NAMA funding, including the challenges and opportunities that developing countries may face in securing suicient and sustainable inance, case studies of successful interactions with private funders, and recommendations to NAMA developers and their international partners to help attract private investment to NAMAs.

NAMAs, the global climate finance landscape and the role of the private sector. In 2012, 68 per cent of the US$359

billion of climate funding worldwide came from the private sector. In addition to inance, the private sector has signiicant project management, monitoring and evaluation capacities. Yet, out of the 45 NAMAs listed in the United Nations Framework Convention on Climate Change NAMA registry as of May 2014, only 36 per cent have acknowledged that they are planning to work with the private sector. Reliance on international public sector funding for NAMAs and the developers’ unfamiliarity with the private sector may have contributed to its limited engagement in these initiatives. However, the situation is changing as more international NAMA support mechanisms are focusing on using public funding to leverage private capital and NAMA bankability, or their capacity for revenue generation, is becoming an important success criteria.

The roles of public and private actors in NAMA funding. When designing bankable NAMAs, developers should consider

the strengths and opportunities brought to the table by national governments and agencies, bilateral and multilateral stakeholders, and private actors. Of special importance are mechanisms ensuring cross-sector collaboration, such as public-private partnerships.

Key aspects of initiatives that have attracted private finance. Many such initiatives exist both within and outside the

NAMA domain. To help NAMA developers learn more about them, this paper reviews eight case studies of climate change mitigation and public infrastructure creation or transformation projects and programs that have successfully mobilized, or have the potential to mobilize, private investments. The case studies include initiatives from Bulgaria, Cape Verde, Croatia, Mexico, Morocco, the Philippines, Tunisia and the United Kingdom. The eight case studies demonstrate the following six aspects of bankable projects and programs: their implementing bodies and ownership, the role of national public actors, domestic and international private sectors, international stakeholders and the needs of end users. The eight case studies show the need for an implementing body to manage the public and private inancial lows efectively. Ownership is the structure of an initiative and the roles of various stakeholders in it. Of particular interest here is the role of the private sector in decision making and implementation. The role of government funding and policy

organizations are also prominent, as they provide grants, concessional and market-rate loans, and loan guarantees, as well as management support and technical assistance. Finally, bankability is afected by a project or program’s ability to take into account the demand of end users and the situation in relevant markets and by its ability to correctly identify the challenges and opportunities that exist for end users.

Risk mitigation mechanisms. In addition to discussing the roles of various stakeholders and their interactions, the

case studies demonstrate diverse mechanisms that projects and programs employ to mitigate various risks for private funders, including political, economic, inancial, performance and other risks. The eight case studies have employed a wide range of risk mitigation tools, including government policies, risk and credit guarantees, demand stimulation measures, loan repayment facilitation schemes, credit ratings, power purchase agreements, and operations and maintenance contracts. A key lesson to be learned from the case studies is that risk mitigation is crucial to the success of bankable NAMAs.

Recommendations for NAMA developers and international stakeholders. Considering that transformative initiatives

such as NAMAs require sophisticated management and inancial frameworks, strengthening coordination between relevant government agencies, bilateral and multilateral stakeholders, and private funders is of utmost importance. NAMA developers should study the global NAMA inance landscape to identify as many domestic and international funding sources as possible. They should take steps to attract private investments early in the NAMA development process and use public inance to leverage the maximum possible amounts of private inance. To facilitate private investment, NAMA developers should utilize a broad range of risk mitigation mechanisms.

Activities to link NAMA developers and sources of private inance are especially important for successfully leveraging private investment. Considering that, international stakeholders can help NAMA developers by collecting and disseminating information about possible funding sources and best practices in private funding. They can also proactively engage the private sector in NAMAs by supplying potential investors and lenders through information and training related to NAMAs.

The NAMA mechanism is in an early stage of development. It is hoped that designing bankable NAMAs will help make climate change mitigation eforts in developing countries sustainable and contribute to low-carbon development in those countries, thus creating long-lasting economic, social and environmental beneits.

Table of Contents

1.0 Background ... 1

1.1 What are NAMAs? ... 1

1.2 Climate Finance and NAMA Funding: Challenges and Opportunities ...3

2.0 The Roles of Public and Private Actors in NAMA Funding ...7

2.1 National Governments, Agencies and State Banks ...7

2.2 International Bilateral and Multilateral Stakeholders ... 8

2.3 Private Actors ...12

2.4 Public-Private Partnerships ...14

3.0 Bankable NAMAs: Stakeholders and Implementation Mechanisms ...15

3.1 Implementing Entities ...18

3.2 Ownership ...19

3.3 National Governments, Agencies and State Banks ...20

3.4 Domestic and International Private Sector ...21

3.5 Bilateral and Multilateral Stakeholders ...22

3.6 End Users ...23

4.0 Risk Mitigation Mechanisms: Case Studies ...25

4.1 Risk Mitigation Frameworks and Government Leadership ...26

4.2 Markets, Economies of Scale and Facilitated Loan Repayment ...27

4.3 Concessional Loans, Guarantees and Other Financial Mechanisms ...29

5.0 Conclusions and Recommendations ...32

5.1 Recommendations for NAMA Developers ...32

5.2 Recommendations for International Stakeholders ...34

6.0 References ...36

Appendix I: NAMAs in the Public Registry ...43

Appendix II: NAMA Support Facilities ...47

AFC Africa Finance Corporation AFD French Development Agency AfDB African Development Bank AMC Advance market commitments ANME National Agency for Energy

Conservation of Tunisia

BEEF Bulgarian Energy Eiciency Fund BFI Bilateral inancing institutions CDM Clean Development Mechanism CER Certiied Emission Reductions

CONAVI Mexico’s National Housing Commission CSP Concentrated solar power

CTF Clean Technology Fund

DBP Development Bank of the Philippines DCA Development cooperation agency DFID U.K. Department for International Development

EE Energy eiciency

EIB European Investment Bank ESCO Energy service company FDI Foreign direct investments GCF Green Climate Fund GEF Global Environment Facility

GHG Greenhouse gas

GIZ German Society for International Cooperation

HBOR Croatian Bank for Reconstruction and Development

HEP Hrvatska Elektroprivreda d.d.

IBRD International Bank for Reconstruction

and Development

IDB Inter-American Development Bank IFI International inancial institution

JBIC Japan Bank for International Cooperation KfW German Development Bank

LAIF Latin America Investment Facility

LGU Local government units MASEN Moroccan Solar Energy Agency MATTM Italian Ministry of the Environment

for the Protection of Land and Sea MDB Multilateral development banks MDG Millennium Development Goals

MEDREC Mediterranean Renewable Energy Centre NAMA Nationally Appropriate Mitigation Actions OECD Organisation for Economic Co-operation

and Development

ONEE Moroccan National Oice for Electricity and Potable Water

PCG Partial credit guarantees PFI Private inancing institutions

PGGM Pension Fund for Care and Well-Being PPA Power purchase agreements

PPP Public-private partnership PWRF Philippine Water Revolving Fund

RE Renewable energy

ROC Renewables obligation certiicate SHF Mexican Federal Mortgage Society SPC Solar power company

SPV Special purpose vehicle STB Tunisian National Bank

STEG Tunisian Society for Electricity and Gas SWH Solar water heating

UBCI Tunisian Commercial and Industrial

Banking Union

UNDP UN Development Programme UNEP UN Environment Programme

UNFCCC UN Framework Convention on Climate Change UNFCCC COP UNFCCC Conference of Parties

USAID U.S. Agency for International Development

WD Water district

WOW Walney Ofshore Windfarms WSP Water service provider

Glossary of Financial Terms

Bankability Attractiveness to investors or lenders based on revenue-generating potential Collateral Assets ofered by the borrower to secure a loan

Concessional loan Loan provided on more generous terms compared to market terms—e.g., with grace periods or lower interest rates

Credit enhancement Improving credit rating with a lender—e.g., through additional collateral or guarantees Credit rating Evaluating a borrower’s inancial health and capacity for loan repayment

Debt Obligation-based inancial arrangement in which the creditor (lender) lends assets to the debtor (borrower) in exchange for a promise to repay, usually with interest Derivative Security with value derived from an underlying asset

Equity Share in a company’s proits—e.g., company stocks

Green bond Fixed-income security facilitating investment in sustainable companies, programs or projects

Impact investment Investment with social or environmental impact Market loan Debt-based funding arrangement on market terms

Mezzanine inance Hybrid inancial arrangement that includes elements of debt and equity thus providing additional lexibility (also referred to as quasi-equity)

Non-recourse debt Collateralized debt arrangement in which recourse is limited to the borrower’s current assets; recourse of collateral is not possible

Partial credit guarantees Guarantees of partial debt repayment in case of the borrower’s default

Partial risk guarantees Guarantees of partial debt repayment in case of sovereign risk—e.g., government default

Private equity Equity of a company that is not listed on a public exchange Public equity Equity of a company that is listed on a public exchange

Quasi-equity Debt with some characteristics of equity (also referred to as mezzanine inance) Risk-adjusted return Adjusting investment returns for the value of risks involved in the investment Securitization Pooling inancial assets (e.g., debt obligations) and selling them to investors in

exchange for tradable inancial instruments (securities)

Seniority Order of loan repayment in the event of bankruptcy: senior debt is repaid before subordinated debt

Sovereign guarantees Government guarantees of loan repayment in case of the borrower’s default Tenor Loan term length or time remaining until loan repayment

1.0 Background

1.1

What are NAMAs?

Nationally Appropriate Mitigation Actions (NAMAs) are an emerging climate mitigation mechanism that may include projects, strategies and policies that contribute to greenhouse gas (GHG) emission reductions in developing countries and facilitate low-carbon development in those countries. A NAMA can be “any mitigation action tailored to the national context, characteristics and capabilities, and embedded in national sustainable development priorities” (Sharma & Desgain, 2013, p. 11). NAMAs have gained signiicance as part of two key climate governance frameworks—the 2007 Bali Action Plan and the 2010 Cancun Agreements. NAMAs are important for low-carbon development strategies because they help link climate mitigation eforts with social and economic development priorities (Sawyer et al., 2013, p. 5). Another beneit of NAMAs is that their geographic spread is potentially much more ambitious than with existing mitigation instruments such as the projects in the Clean Development Mechanism (CDM) framework that have largely concentrated in Asia and the Paciic and in several emerging economies; thus, NAMAs have allowed more developing countries to implement mitigation projects (Van Tilburg et al., 2013, p. 11). Finally, NAMAs may be divided into opportunistic short-term actions—those without a signiicant multiplier efect on development—and transformative policy-based actions—those that can potentially lead to signiicant shifts in a country’s development path (Vanamali, 2012, p. 12). Transformative NAMAs have to be aligned with sectoral or national development priorities and, as such, require high-level commitment from particular sectors or national governments (Hänsel et al., 2012, p. 23).

As shown in Figure 1, NAMAs can be divided into three types by funding sources: 1. Unilateral NAMAs rely on domestic public and private inance.

2. Supported NAMAs require international funding in addition to domestic contributions. 3. Credited NAMAs are funded through carbon markets1 _{(Sawyer et al., 2013, p. 2).}

A very important aspect of NAMA funding is bankability. According to Khalil (2012), a bankable NAMA is one that has committed public and private stakeholders, evidence of economic beneits from implementation, validated economic assumptions regarding the NAMA’s inputs and outputs, positive inancing indicators, prudent implementation, suicient funding, contractual structure to mitigate risks at various stages of implementation, and sustainable operations (Khalil, 2012, p. 11).

FIGURE 1. NAMA TYPES BY FUNDING SOURCE

Source: Sawyer et al. (2013, p. 2)

Based on the decisions of the United Nations Framework Convention on Climate Change (UNFCCC)’s 16th Conference of Parties (2010), in 2013 UNFCCC set up a registry of NAMAs seeking international support. The scope of this registry is to help NAMA developers obtain inancial, technological and capacity-building support for their projects. Participation in the registry is voluntary; as such, the registry is not comprehensive, as some NAMAs are not listed. As of May 2014 the registry lists 45 NAMAs, including 13 NAMAs seeking support for preparation, 28 NAMAs seeking support for implementation and 4 NAMAs seeking recognition. The registry places NAMA submissions into seven mitigation sectors; each submission may include activities in more than one sector. As can be seen in Figure 2, as of May 2014 the majority of the submitted NAMAs were in the energy sector, while NAMAs in transport, forestry and agriculture were the smallest shares of the total.

Although NAMA preparation is often done with support from international organizations and experts, it is expected that accumulating best practices should allow countries to develop NAMAs using their own resources—that is, to develop unilateral NAMAs (Hänsel et al., 2012, p. 15).

1.2

Climate Finance and NAMA Funding: Challenges and Opportunities

Currently there is no internationally accepted standard deinition of climate inance. According to a deinition ofered by Brambhatt (2011), climate inance includes “resources that catalyze low-carbon and climate-resilient development by covering the costs and risks of climate action, supporting an enabling environment and capacity for adaptation and mitigation, and encouraging research, development, and deployment of new technologies” (p. 11). In 2012 the total amount of climate funding worldwide was US$359 billion; 68 per cent of that amount came from the private sector and 32 per cent from the public sector (Buchner et al., 2013, p. 6). Public sources include domestic, bilateral and multilateral funding, while private sources include foreign direct investment (FDI), loans and equity investment in technologies and projects enabling climate change mitigation and adaptation. Domestic and international public and private funding is blended together, thus reducing transaction costs and increasing impact (Sawyer et al., 2013, p. 37). Between 30 to 50 per cent of global climate inance (the percentage depends on research methodologies used) is deployed in developing countries (Buchner et al., 2013, p. 3). While emerging economies are beginning to play an active role in climate inance, members of the Organisation for Economic Co-operation and Development (OECD) provide most of the international public funding for climate change mitigation, either directly through bilateral mechanisms or indirectly through multilateral initiatives (Limaye & Zhu, 2012, p. 46).

According to some estimates, under a low-carbon development scenario an average of US$5.7 trillion per annum in green investments globally will be required between 2010 and 2030 (World Economic Forum, 2013, p. 13). Developed countries have pledged to work towards ensuring the availability of US$100 billion per year for developing countries by 2020 (Haites, 2013, p. 1). The funding situation in the interim period between 2014 and 2020 remains unclear (Boyle, 2012, p. 2). As mitigation actions gain speed, funding needs will increase. By 2030 climate change mitigation will require US$175 billion to US$565 billion globally on an annual basis (Haites, 2013, p. 7). Mitigation eforts in developing countries may require up to US$300 billion per year by 2020 (Gagnon-Lebrun & Barrigh, 2013, p. 117). Adaptation needs will also be signiicant. It is estimated that public bilateral and multilateral eforts combined with carbon markets may help leverage up to an additional US$200 billion to US$400 billion by 2020 in gross private funding relative to current forecasts (Brambhatt, 2011, p. 7). In 2013 about 65 per cent of all adaptation inance was invested in developing countries (Buchner et al., 2013, p. II). Developing countries can be expected to continue to receive a signiicant share of global adaptation inance. In 2010, at UNFCCC’s Conference of Parties (COP) 16 in Cancun, it was decided to establish the Green Climate Fund (GCF), which will be the main operational inancial mechanism of the UNFCCC. The GCF is expected to help developing countries obtain funding for their mitigation eforts, but it has not yet become fully operational. Over time, GCF will aim to ensure a 50/50 balance between mitigation and adaptation in its work (GCF, 2014, p. 4).

Access to international climate inance is essential for developers of supported NAMAs. According to the NAMA Registry, as of May 2014 requests for NAMA inancial support amounted to over US$4 billion (UNFCCC, 2014). Since not all existing NAMAs have been included in the voluntary registry, the actual requested amounts of inancial support may be larger. Figure 3 shows that, for the NAMAs listed in the registry, requests for inancial support vary from less than US$1 million (for example, NAMAs from the Cook Islands, Mali and Uruguay) to over US$1 billion (a NAMA from Serbia). This may relect the size of the economies in question as well as the level of ambition displayed in these NAMAs. One important question in this regard is: what are the chances for stable and long-term inancing of NAMAs?

FIGURE 3. REQUESTED FINANCIAL SUPPORT FOR NAMAS

Source: UNFCCC (2014)

The issue of securing sustainable (stable and long-term) sources of inance for climate mitigation and adaptation has been on the global agenda for a few decades. Just in the past decade, this issue was highlighted in the 2007 Bali Action Plan, 2009 Copenhagen Accord and 2010 Cancun decisions. Developing countries face three challenges as they attempt to secure long-term climate inance. First, pledges of international public inance are not the same as actual disbursements: stakeholders may pledge more than what they actually deliver. Second, project-based inance is not sustainable for long-term programs that are intended to transform developing countries’ economies and to develop new markets. Third, the future of carbon inance is unclear, as some carbon markets are struggling to sustain a meaningful carbon price. These challenges, however, do not result in a negative outlook for developing countries. In fact, understanding the volatility of international climate inance provides an opportunity by allowing these countries to approach climate inance strategically, cultivating various funding sources rather than relying on the funding that is currently available (Vanamali, 2012, p. 12).

In particular, there is growing understanding of the fact that sustainable inancing of NAMAs requires blending funds from public and private sources (Wilkes, Tennigkeit, & Solymosi 2013, p. 41). Both the public and private sectors beneit from the blending process. For example, according to Khalil (2012), it gives domestic private inancial companies opportunities to support the national economy in a sustainable way, obtain experience in project funding with domestic and international public partners, and diversify their portfolios (Khalil, 2012, p. 6). Given this, NAMA developers can beneit from existing experience in using public inance to leverage private investments. One deinition of leveraging

[A]bility of a public inancial commitment to mobilize some larger multiple of private capital for investment in a speciic project or undertaking … and to the potential for catalytic or transformational public investments or initiatives to encourage much more widespread climate-friendly changes in behaviour by private irms across the whole economy … by addressing economy-wide market failures or barriers to investment. (Brambhatt, 2011, p. 34)

Based on the experience of multilateral development banks (MDBs), the leverage factor may range from three to six for non-concessional loans and eight to 10 and above for concessional loans and grants (Brambhatt, 2011, p. 39).

Considering the above, NAMA developers should be encouraged to consider leveraging private inance and to familiarize themselves with the speciics of working with the private sector. To succeed in this, governments and international stakeholders should help NAMA developers create conditions for dialogue with the private sector regarding the beneits and modalities of investing in NAMAs (van Tilburg et al., 2013, p. 5). Speciically, NAMA developers should analyze the opportunities for private investments in their countries and, based on that, assess the need for public inance that they will use to leverage private funding (Vanamali, 2012, p. 7). Several practical challenges should be noted in this regard. First, it is not always clear how NAMAs will incorporate private actors, considering that NAMAs are “owned” by national governments. Second, information about the role of the private sector in mitigation eforts is inconsistent, and the UNFCCC process does not always take the private sector into account (Limaye & Zhu, 2012, p. 4). Third, in spite of the overall abundance of data on climate funding, speciic information about the incentives and opportunities for the private sector to invest in NAMAs is not always available, which may reduce the private sector’s interest in NAMAs.

Figure 4 outlines seven steps in the preparation of NAMAs, from identiication to implementation. While inancing is mentioned only at step 6, it is advisable to start thinking about ways to inance future NAMAs already at step 1 or 2. For those NAMA developers who are interested in leveraging private inance, this thinking should include the private sector. Speciically, NAMA developers should consult private sector stakeholders during the early stages of NAMA development, obtain their feedback on the design of the draft NAMAs, and involve them in the implementation of NAMAs (World Business Council for Sustainable Development, 2013, p. 5). This is important because early planning allows developers to foresee future opportunities for proit generation, therefore making them attractive to the private sector.

FIGURE 4: SEVEN STAGES OF NAMA PREPARATION

Source: Cameron (2013, p. 2)

So far, only 16 of the 45 NAMAs listed in the UNFCCC registry have explicitly stated their plans to engage private companies as funders and/or implementing parties (UNFCCC, 2014). Information in Appendix I shows that these 16 NAMAs intend to facilitate private sector investment in waste management, solar and geothermal energy generation,

sustainable forestry, energy eiciency in transportation, and to engage companies in clean production agreements. This corresponds with general trends in private sector investment in mitigation eforts. Energy eiciency and renewable energy, waste management and cleantech generally present more examples of private sector interventions compared to agriculture and forestry (Patel, 2011, p. 5). For example, four out of ive NAMAs with private sector participation that took part in the Mitigation Momentum project2 _{are related to renewable energy, energy eiciency or waste to energy}

(van Tilburg et al., 2012, p. 18).

Projects in the renewable energy and energy-eiciency sectors are often attractive for private investments because subsidies associated with those sectors help reduce risks for investors (such as deployment risks associated with new technologies). The importance of such subsidies, however, is declining with the costs of deploying the two leading renewable energy technologies—wind and solar (Frankfurt School of Finance & Management and BNEF, 2014, p. 15). Initiatives in the transport sector may also be attractive for private investors, as they are generally funded by governments and development cooperation agencies and so may be associated with less risk compared to initiatives in other sectors (Huizenga and Bakker, 2010, p. 5). As for agriculture, Wilkes et al. (2013) note that, while it is possible to identify 62 agricultural NAMAs from 30 countries, climate projects in agriculture are receiving a small share of overall inancing (pp. vii–viii). One of the reasons is that agriculture projects are associated with signiicant capital expenses and high transaction costs (Bockel, Gentien, Tinloy, & Bromhead, 2010, p. 18).

As noted by Institutional Investors Group on Climate Change et al. (2011), NAMA developers should keep in mind that private investments require the development and implementation of stable and predictable policy frameworks that create incentives for private investment and help address inherent risks related to those investments (p. 2). These issues are beginning to be addressed through international NAMA support facilities that have emerged in the past years. Currently, eight such initiatives are listed in the UNFCCC NAMA registry, including the International Climate Initiative, the NAMA Facility, the Global Environment Facility Trust Fund, the EU-Africa Infrastructure Trust Fund, the Latin American Investment Facility and other initiatives. Most of them have already funded the preparation or implementation of NAMAs and other low-carbon development programs. Appendix II provides information about these initiatives. While some of these initiatives are not NAMA- or climate-speciic, all of them have a signiicant focus on low-carbon development and market transformation, and on facilitating private investments. In addition to these and other eforts, encouraging private investments will be an important part of the GCF’s operations. According to GCF (2013) documents, the fund’s Private Sector Facility will enable the fund to “directly and indirectly inance private sector mitigation and adaptation activities at the national, regional and international levels” (p. 1). GCF’s Investment Framework speciies that the fund will “maximize fund-wide engagement with the private sector, including through signiicant allocation to the Private Sector Facility” (GCF, 2014, p. 4). Speciic aspects of private investment in climate change mitigation projects, and NAMAs in particular, are discussed in the next sections.

2.0 The Roles of Public and Private Actors in NAMA Funding

Climate change mitigation programs and projects can be funded by domestic and international public actors and domestic and international private actors. For NAMA developers, working with each group of actors is associated with speciic issues that are discussed below.

2.1

National Governments, Agencies and State Banks

The role of domestic public actors is important in terms of both funding and policy setting. This section is dedicated to funding, and policy-setting is discussed in the section on risk mitigation. Domestic public funding comes primarily from taxes, but governments also use other instruments to collect revenue, including removing or redistributing fossil fuel subsidies and collecting money from domestic carbon markets and ofsets (United Nations, 2010, p. 28). This funding is disbursed primarily through grants, balance sheet inancing of projects and facilities and concessional inance (Buchner et al., 2012b, p. 23). Concessional inance may include loans with reduced rates, longer tenors, or a lower level of seniority or collateralization. These instruments can be used to address market failures, to ensure equal access to goods or services or to promote investments in innovations (Patel, 2011, pp. 16–17). For example, due to risks for investors in new technologies in energy generation and energy eiciency, the market often fails to inance such technologies, and the public sector plays an important role in correcting that problem (Brambhatt, 2011, p. 12). Figure 5 illustrates the important role of governments in inancing early-stage technology development.

FIGURE 5. SOURCES OF FUNDING AT DIFFERENT STAGES OF TECHNOLOGY DEVELOPMENT AND DIFFUSION

Source: Patel (2011, p. 4)

Overall, a large share of climate mitigation funding globally is provided in the form of concessional inance, often in partnerships between public and private inancial institutions. For example, a public bank may provide a concessional loan to a commercial bank on the condition that the commercial bank matches the loan with its own funding so as to provide a concessional loan to the end recipient (Limaye & Zhu, 2012, p. 47).

Governments may provide funds to international (bilateral and multilateral) and domestic initiatives. According to Buchner et al. (2013), in 2011–2012 public sector funding averaged US$135 billion worldwide, or almost 38 per cent

of total climate inance (p. 6). Increasing domestic climate funding may be challenging for many countries that are unwilling or unable to increase their tax bases, especially in the wake of the recent inancial crisis (United Nations, 2010, p. 6). Countries are increasingly using national climate funds to coordinate climate funding at the domestic level. According to Flynn (2011), national climate funds perform four useful functions in the context of climate inance: they redirect funds towards activities that help address climate change, they blend inance from several sources to maximize impact, they coordinate climate change activities at the national level and they help countries manage inancial resources better (p. 8).

It is important for governments to design comprehensive strategies for attracting climate inance. For example, O’Connor & Chenoweth (2010) recommend several measures for the government of Australia that should form a package to inance domestic clean technologies. Such a package would include utilizing the government’s AAA credit rating and available inancing and iscal tools such as credit enhancement, debt, equity, tax concessions and credits to establish and support a clean energy inance corporation; to issue climate bonds to meet the demand for sustainable investment; and to participate in climate projects, including through power purchase agreements” (p. 7). While the situation in Australia may not necessarily be applicable to many developing countries, this example demonstrates the importance of comprehensive approaches and strategic thinking.

To be able to prioritize climate change mitigation spending in the future, governments must demonstrate to society that they are using public inance efectively, with signiicant positive economic, environmental and social efects (Buchner et al., 2012a, p. 2). Arguably, one of the best uses for public inance is to prepare emerging projects or programs for private investment. Private funders are often risk-averse, and public funding is necessary for leveraging private investments in new mechanisms such as NAMAs. The presence of public funds sends a positive signal to private funders and serves as a guarantee of the project’s viability. Moreover, public funding often becomes the only opportunity to inance those aspects of NAMAs that have low potential for private investments (such as operational costs). That is why public inances must be used strategically. For example, investments in renewable energy technologies require public inance to play a key role in enabling those technologies to reach the stage when they can be commercialized.

Realizing the importance of private investments, governments often make a signiicant efort to leverage private funding for climate change mitigation and infrastructure transformation initiatives. There is no single recipe for leveraging funds. Some of the instruments the public sector may use to leverage private funding for renewable energy NAMAs are loans, investment inance (funding in return for an equity stake), credit guarantees (a tool to mobilize private inance for projects with perceived repayment risk) and public procurement (preferential purchases of generated energy or equipment) (Michaelowa et al., 2012, p. 20). Other instruments may include subsidies and feed-in tarifs or measures to support technology transfer, capacity building and technical assistance. The amount of leverage will depend, among other things, on the market potential, indicating that it is possible to leverage more funding for already well-known technologies (Patel, 2011, p. 16).

2.2

International Bilateral and Multilateral Stakeholders

Currently bilateral funding has the largest share of total international public funding of climate initiatives (Vanamali, 2012, p. 6). In 2010, bilateral funding constituted 25 per cent of the total climate funding and 62 per cent of the total public funding (Haites, 2013, p. 3). Bilateral inancing institutions (BFIs) and development cooperation agencies (DCAs) act on behalf of developed countries, primarily OECD members, to inance climate projects in developing countries and to provide technical assistance. An important diference between BFIs and DCAs is that BFIs are for-proit institutions that usually provide loans while DCAs care primarily for development and often provide grants (Limaye & Zhu, 2012, p. 31). Table 1 lists some of the leading BFIs and DCAs supporting climate projects. Examples of multilateral initiatives include the NAMA support facilities mentioned in the previous section and in Appendix II.

TABLE 1. EXAMPLES OF BILATERAL FINANCING INSTITUTIONS AND DEVELOPMENT COOPERATION AGENCIES

COUNTRY FINANCING INSTITUTION DEVELOPMENT COOPERATION AGENCY

Germany German Development Bank German Society for International Cooperation

France PROPARCO (part of the French Development

Agency Group)

French Development Agency

Japan Japan Bank for International Cooperation Japan International Cooperation Agency

Netherlands Netherlands Development Finance Company Ministry of Development Cooperation

Norway Norwegian Agency for Development Cooperation International Development Program at the Ministry

of Foreign Afairs

Sweden Swedfund International AB Swedish International Development Agency

United States Overseas Private Investment Corporation US Agency for International Development

Source: Limaye & Zhu (2012, p. 32)

Bilateral stakeholders are instrumental in designing innovative funding mechanisms. For example, the U.K. Department for International Development (DFID) has pioneered the use of advance market commitments (AMCs), a potentially useful instrument in the design of NAMA funding modalities. An AMC is a market pull mechanism to incentivize the production of innovative products by guaranteeing their purchase at a guaranteed price over a certain period of time, using donor funding (Brambhatt, 2011, p. 45). According to Chatham House & DFID (2010), an essential aspect of AMCs is a inancial agreement guaranteeing that once developed, a new product will have a market price to ensure reimbursement of project development costs (p. 4). AMCs may prove useful in the provision of energy for those communities that are connected to a central grid (Chatham House & DFID, 2010, pp. 11–13). In addition to funding, bilateral initiatives also provide technical support and capacity building to NAMA developers (although often through diferent vehicles). For example, while the German Development Bank (KfW) has provided inancial support to NAMAs, the German Society for International Cooperation (GIZ) has published and supported several technical guides and early analyses of NAMAs.

Multilateral stakeholders are also important for global climate inance. These stakeholders include international organizations such as UN agencies, MDBs such as the World Bank, climate funds such as the GCF and special funds. Multilaterals provide inancial and technical assistance and have played a signiicant role in NAMA development and early funding. Multilateral stakeholders provide both concessional and market-rate inance. According to Falconer and Frisari (2012), concessional inance and guarantees provided by multilateral stakeholders help increase investors’ conidence in the project. Multilateral stakeholders often provide long-tenor loans (for example, loans with a 15-year maturity compared to commercial loans with a ive-year tenor) that are more afordable to borrowers (Patel, 2011, p. 19).

At the same time, multilateral stakeholders often design inancial schemes that reduce the use of concessional inance in order to avoid market distortions and to encourage the growth of commercial markets in developing countries (Patel, 2011, p. 20). For example, the International Monetary Fund’s blended inance approach combines concessional inance and market-rate inance to support initiatives with market potential (International Finance Corporation, 2012, p. 6). In addition to inance, donors provide technical assistance based on their long-term experience in project design and management and provide international policy support (Falconer & Frisari, 2012, p. 22). Donors may choose to provide technical assistance instead of funding, as it is an important tool for increasing project capacity and sustainability (Patel, 2011, p. 18).

Due to the nature of their funding modalities, multilateral stakeholders often utilize combinations of concessional and market-rate loans and use rigorous reporting and performance evaluation frameworks. Multilaterals help bridge the gap between public and private inance, including building NAMA developers’ capacity for sound inancial planning and project implementation. For example, the UN Development Programme (UNDP) helps countries attract new inances through the Millennium Development Goals (MDG) Carbon Facility, which links the private sector in developing countries to carbon inance, and through the Capacity Development for Decision-Makers to Address Climate Change, which helps countries perform investment analyses and better prepare for climate change investments (Flynn, 2011, p. 41). Multilateral stakeholders also help mobilize new actors and funding modalities to the ield of climate inance. For example, MDBs attract inance from pension funds and institutional investors through green bonds (Patel, 2011, p. 12). Green bonds are instruments “speciically issued to inance environmental protection, sustainability or speciic climate mitigation and adaptation measures” (Kidney & Oliver, 2014, p. 8). These bonds have the following beneits: they help access institutional capital, reduce costs of capital compared to ordinary debt, and enable institutional investors to match returns and liabilities (Brambhatt, 2011, p. 39). For example, the World Bank’s green bonds are designed for institutional investors wishing to invest in climate change mitigation and adaptation projects. These green bonds have the same credit quality (Aaa/AAA) as the World Bank’s other credit products, and there is no project risk involved since bond repayments are not linked to project performance (World Bank, 2013, p. 2). The International Finance Corporation, a World Bank arm that focuses on private sector investments, has a similar green bonds program. Over 76 per cent of climate-themed bonds in 2013 were issued in the transport sector, and about 12 per cent of them were issued in the energy sector (Oliver & Boulle, 2013, p. 3). In addition to inancial due diligence, green bonds have to be certiied to ensure that they are indeed contributing to low-carbon development. The bonds are certiied through the Climate Bonds Standard and Certiication Scheme that involves large-scale institutional investors and investor groups, inancial service companies, and environmental non-proit organizations (Climate Bonds Initiative, 2011).

As Figure 6 demonstrates, green bond yields are typically not very high; most of these bonds ofer yields in the 0–3 per cent range, and only a small share of green bonds ofer yields above 5 per cent. Nevertheless, returns from green bonds are often greater than benchmark Treasury bonds (TD Economics, 2013, p. 4). In addition, there is signiicant growth potential for green bonds as the number and scale of renewable energy projects increases each year. Emerging economies in particular have a role to play in green bonds. For example, in 2012 Spanish developer Acciona issued a US$300 million bond for its wind project Oaxaca in Mexico, “the irst investment-grade project bonds from an emerging market” (Oliver & Boulle, 2013, p. 6).

FIGURE 6: YIELDS FROM GREEN BONDS (PER CENT OF GREEN BONDS GLOBALLY3₎ Source: Oliver & Boulle (2013, p. 4)

Similarly to bilateral stakeholders, multilaterals also help pioneer innovative funding mechanisms such as output-based aid, a “results-output-based inancing mechanism that supports the provision of basic public services by delegating the delivery of outputs … to a third party (typically a private operator) in exchange for the payment of a subsidy upon delivery of speciic outputs” (International Development Association, 2009, p. 1). According to Kumar & Sadeque (2012), elements of output-based aid were used in a solar energy program in Bangladesh supported by the World Bank and other MDBs; the program uses subsidy payments and long-term credit to households to increase the afordability of energy (Kumar & Sadeque, 2012, p. 1). Aside from cultivating new investors and helping create new funding mechanisms, some multilateral donors have extensive guarantee and insurance programs. For example, the World Bank provides partial risk guarantees covering lenders against state entities’ default on their contractual obligations, and partial credit guarantees covering credit risks of public borrowers; in addition, the Multilateral Investment Guarantee Agency, part of the World Bank group, provides political risk insurance (World Bank, 2012, p. 14).

Multilateral stakeholders also collect and disseminate information about investment opportunities that exist in developing countries (Brambhatt, 2011, p. 41). In addition, those stakeholders are experienced in combining inance from diferent sources. For example, climate funds blend domestic and international funding for project-based inance with a focus on environmental, social and economic sustainability (Buchner et al., 2012b, p. 39), and special funds such as the Africa Enterprise Challenge Fund or the China Environment Fund use public and commercial inance to leverage private inance for innovative business products (Limaye & Zhu, 2012, p. 60). Finally, multilateral stakeholders help develop essential criteria for NAMA fundability. For example, the United Nations Environmental Programme (UNEP) has proposed the following criteria: level of ambition, including both GHG reduction and transformation potential; national ownership, including proactive governments, co-beneits and embeddedness in low-carbon development; bankability, including inancial viability and inancial capacity; and a measuring, reporting and veriication system that has broad data availability and is robust and cost-efective (UNEP, 2012, p. 12).

2.3

Private Actors

It is often believed that, while the public sector will continue to guide the process of addressing climate change, it is the private sector’s involvement that will enable large-scale infrastructural transformations (Corfee-Morlot et al., 2012, pp. 4–5). Key climate policy documents such as the Copenhagen Agreement and the Cancun Accord specify that combining public and private capital is essential to addressing climate change mitigation (Vanamali, 2012, p. 15). Private actors may have diferent motivations for inancing climate change mitigation projects. They may be driven by proits or the desire for social impact, by the desire to develop new markets or obtain access to carbon credits. Just in 2010–2011, the private sector invested US$224 billion in global climate inance, over 63 per cent of the global total (Buchner et al., 2013, p. 8). Sources of private funding include private and public equity and debt, and private actors that may be interested in inancing climate projects include companies, commercial banks, non-bank inancial institutions, private equity and institutional investors (Patel, 2011, p. 11). While banks provide much-needed debt, FDI is the largest source of climate funding; FDI is also important because of the associated knowledge and technology transfer (Limaye & Zhu, 2012, p. 55).

Private investment decisions are based on risk-return analysis—a project is attractive if it has the potential for proit generation and a relatively high reward/risk ratio (Limaye & Zhu, 2012, p. 56; Patel, 2011, p. 6). Table 2 illustrates diferent rates of return for projects or programs and types of funding that correspond to those returns. For example, a negative rate of return means that the proposed project or program is probably not commercially viable and requires grants to cover operating costs (UNFCCC, 2006, p. 85). Table 3 shows that modalities of private inance are related to the level of maturity of the initiative in question. Private companies are reluctant to pay for research and concentrate on technology development (venture and private equity capital) and commercial deployment (private equity, debt, and project inance) (Patel, 2011, p. 4). The same pattern is to be expected with regard to NAMA funding. For example, there are two broad types of NAMA-related costs: preparation and implementation (De Vit, 2012, p. 28). It is likely that NAMA preparation will be funded primarily from domestic and international public sources as the private sector is generally not willing to fund feasibility studies. Therefore, public money can be used to conduct a high-quality feasibility study that identiies potential NAMAs, including those NAMAs that have a potential to attract private sector investments. That feasibility study would help identify bankable NAMAs that are likely to be funded by the private sector.

TABLE 2. TYPES OF FUNDING CORRESPONDING TO DIFFERENT RATES OF RETURN ESTIMATED RATE OF RETURN TYPE OF FUNDING

Negative/0% Grants/subsidies

0% to 5-7% Donors or impact investors (those who consider inancial, social, and environmental returns)

Over 5-7% Specialized lender-investor-donors (those who see the blended value potential of investments)

Above 10% Private investors/lenders

TABLE 3: CLASSIFICATION OF PRIVATE FUNDING FOR CLEAN ENERGY PROJECTS

LEVEL OF MATURITY MODALITIES CHALLENGES

Early funding Non-inancial funders:

utility companies, local entrepreneurs, venture capitalists and angel investors

• Utility companies may be wary of developing country risks. • Local entrepreneurs may not have signiicant experience. • Venture capitalists generally do not fund project development. • Angel capital is not widely used in developing countries.

Mid-term funding Financial funders: private

equity and infrastructure funds; funders that provide mezzanine capital, commercial bank debt and carbon inance

• Private equity funds have low appetite for project development due to high risks.

• Infrastructure funds often have no experience with clean-energy projects.

• Mezzanine capital is not frequently used in clean-energy projects. • Commercial bank debt is generally not used for project

development.

• Carbon inance is not widespread due to high inancial risks.

Late-stage funding Capital markets • Only in countries with mature markets and developed industries.

Source: Ritchie & Usher (2011, p. 13–16)

Commenting on the level of domestic and international investment in climate change mitigation and infrastructure creation or transformation, it should be noted that in many developing countries the private sector is at an early stage of development and is unlikely to have the capacity to participate in such initiatives. However, as the case study analysis in the next section demonstrates, where a growing private sector exists, its appetite for participating in such projects can be developed through targeted action, including the creation of incentives, awareness campaigns, co-inancing and other mechanisms. In addition, such initiatives beneit from the emergence and growth of small and medium enterprises such as energy service providers or energy equipment manufacturers, importers and installers. Limited international private investment in these initiatives may be explained by the private sector’s lack of awareness of such opportunities (which, if true, may be partially explained by the insuicient international marketing of those opportunities), by a perception that such investments are too risky or by other reasons. The need to provide conventional business investors with risk-adjusted returns is a barrier for many developing country projects seeking private investments (Haites, 2013, p. 97). However, this is changing as the concept of impact investments is becoming increasingly popular.

In terms of their primary motivations, investors may be divided into commercial and impact investors. While commercial investors are only interested in investing if a project has suiciently high rates of return, impact investors are generally more interested in the triple-bottom line (including larger environmental, social and economic returns beyond the immediate inancial returns on their investments). As the importance of environmental, social and corporate governance issues to investors grows, so do the ranks of investors seeking impact, including through climate change mitigation projects. In the past years, initiatives such as the United Nations Principles for Responsible Investment have led to the emergence of impact investment initiatives such as the International Investors Group on Climate Change (Palandjian, 2009, p. 10). This and other investor coalitions may potentially play a signiicant role in increasing the availability of private inance for NAMAs.

Impact investors are increasingly paying attention to initiatives in developing countries. According to the results of the above mentioned impact investor survey, “34% of respondents focus on investing in Sub-Saharan Africa and 57% focus on food & agriculture” (Saltuk, 2013, p. 5). Considering that many initiatives in developing countries are

associated with signiicant risks for investors, it is important to note that within the impact investor group “impact irst investors” have a higher tolerance for risk than “inancial irst investors” (Palandjian, 2009). According to Palandjian (2009), inancial irst investors are mostly commercial investors primarily interested in inancial returns, while impact irst investors are institutional investors, high-net worth individuals, foundations or social investment-oriented inancial institutions primarily looking to achieve social and environmental impact. Impact irst investors are more willing to accept risks and lower returns on their investments compared to inancial irst investors (Palandjian, 2009, p. 7). It is important, however, that investments in climate change mitigation projects do not necessarily limit investors to below-market returns. In fact, climate projects are increasingly bringing below-market-rate returns to impact investors (Palandjian, 2009, p. 11).

2.4

Public-Private Partnerships

Public-private partnerships (PPPs) have become a key mechanism for cross-sector collaboration. According to Limaye & Zhu (2012), a PPP is a “venture or service that is funded and operated through a partnership of government and one or more private-sector organisations.” (p. 69). Such partnerships can have many forms, including concessions, joint ventures, or outsourcing services. Concessions are government contracts that grant private actors special rights to develop and operate projects; joint ventures are entities with shared ownership by public and private actors; and outsourcing services entail subcontracting a private company to provide services that are typically ofered by the public sector (Hall, de la Motte, & Davies, 2003, pp. 2–4). In the PPP framework, private companies may provide equity and/ or debt inancing alongside the goods and services that they generally deliver. Debt inancing is generally less risky and less expensive for the private sector than equity inancing because, in case of project failure, loan repayments have higher levels of seniority compared to returns from equity; therefore, lenders generally require smaller returns than equity funders (Limaye & Zhu, 2012, p. 57).

In addition to project-based PPPs, governments and development agencies have recently launched large-scale funds and initiatives that aim to mobilize private investment for climate change mitigation and adaptation. A 2013 survey describes 27 such initiatives, focusing on the scope, approaches, policies and mechanisms used to attract private inance, and describing the challenges faced by those initiatives (Polycarp et al., 2013). It should not be assumed that establishing a PPP initiative is a necessary prerequisite to successfully leveraging private funding. While there are many positive sides to PPPs, even in absence of formal PPPs public actors are often capable of attracting private funding or, as demonstrated by case studies in the next section, of addressing market imperfections that lead to end users being unable to attract inance on commercial terms.

3.0 Bankable NAMAs: Stakeholders and Implementation

Mechanisms

4

This section addresses key aspects of climate change mitigation and infrastructure creation or transformation projects that have successfully attracted private investments (or can potentially attract such investments). Results of case study analysis presented in this section demonstrate that developing bankable NAMAs requires attention to the needs and capacities of four types of stakeholders, and to two aspects of their participation in NAMAs. The four types of stakeholders are domestic public actors, international stakeholders, private actors and end users. The two aspects of their participation in NAMAs are the composition and ownership of NAMA-implementing bodies. These six aspects are presented in Figure 7. Implementing bodies are central to the implementation of each initiative since their formats and functions help deine the scope of those initiatives. Ownership refers to the “share” of each type of stakeholder in the decision-making structure. National governments and public agencies may contribute revenues, policy and regulatory support, management and technical assistance. Private actors may co-inance and co-manage the programs and projects. International stakeholders also may provide funding, technical assistance and management capacity. Finally, end users employ the products and services generated by the programs or projects, and provide revenues that make those initiatives inancially viable. These issues are discussed in more detail below.

FIGURE 7. STAKEHOLDERS AND IMPLEMENTATION MECHANISMS

Source: Authors

4 _{This section presents case study analysis based on the following publications: Africa Finance Corporation (n. d. a, n. d. b); African} Development Bank (2012); Ashden (2013); Baccouche (2014); CONAVI & SEMARNAT (2012); Dong Energy (n. d.); Dukov (2009); Ecofys (n. d.); Eleqtra (n. d.); Falconer & Frisari (2012); Green Investment Bank (n. d.); Hervé-Mignucci (2012); Inter-American Development Bank (2012); Mobarek (2014); Paul (2011); Porciuncula (2009); Trabacchi, Micale, & Frisari (2012); USAID (2006); World Bank (2010a); World Bank (2010b), and World Bank (2000).

Although there is no standard practice for judging a speciic NAMA “best practice” for engaging the private sector, and although reports on NAMA implementation are not always publicly available, work is underway to identify best practices in securing private funding for NAMAs. For example, the NAMA Partnership’s inance working group is working to identify potential funding sources for NAMAs and related best practices (van Tilburg et al., 2012, p. 17). In the meantime, NAMA developers can use existing analysis to identify best practices that may help them design bankable NAMAs. For instance, the San Giorgio Group coordinated by the Climate Policy Initiative has done pioneering work studying how public funding is used to leverage private investment. In addition, the World Bank and GEF have provided Internet access to their project reports. Finally, relevant academic publications and presentations by government oicials, project descriptions and reports by international organizations are also available online and by request. Based on these publicly available sources of information, this section discusses eight successful climate change mitigation and infrastructure transformation initiatives. Table 4 contains a brief description of those case studies, and their detailed descriptions can be found in Appendix III. The criteria for selecting the case studies for analysis included: • Transformative capacity: The case studies describe transformative projects in three sectors: renewable energy generation, energy eiciency and water management. The objectives in three of the case studies (Bulgaria, Croatia and Mexico) are related to energy eiciency in buildings and infrastructure. Four case studies (Cape Verde, Morocco, Tunisia and the U.K.) focus on addressing barriers to the development of renewable energy markets. One case study (the Philippines) focuses on transforming water services.5 _{While the case studies do}

not focus on other sectors such as agriculture, forestry, transportation or waste, they can be used to access the potential of private investment in those sectors as well, considering that funding mechanisms used in programs and projects in diferent sectors have many similarities.

• Geographic diversity: The case studies present initiatives implemented in Africa, Asia, Eastern and Western Europe, and Latin America.

• Diferent levels of economic development: The case studies represent both developing and developed countries. While examples from developing countries may be the most relevant to issues that NAMA developers are facing, the U.K. case is an illustration of how these issues are addressed in developed capital markets with established roles for public and private stakeholders.

• Programmatic success: These initiatives are reaching their intended goals in a cost-eicient way and in many cases will continue their operations with support from donors and investors.

• Success in building cross-sector partnerships: Most of the case studies are examples of partnerships that engage domestic and international public and private actors. One case study, the Mexican Sustainable Housing NAMA, has a strong potential for creating successful cross-sector partnerships.

• Success in attracting private inance: Seven initiatives have successfully leveraged private funding and the Mexican Sustainable Housing NAMA is currently not funded from private sources, but is designed so as to potentially attract private investments. This NAMA has “modularity,” that is to say, the ability to adjust funding packages according to investors’ needs (KfW, 2012, p. 8).

TABLE 4: CASE STUDIES: CLIMATE CHANGE MITIGATION AND INFRASTRUCTURE TRANSFORMATION INITIATIVES THAT HAVE MOBILIZED (OR CAN POTENTIALLY MOBILIZE) PRIVATE INVESTMENTS

COUNTRY/ PROJECT NAME/ START AND

END DATES

SECTOR/TYPE ACTORS CONTRIBUTION SCALE FUNDING ARRANGEMENTS/PRIVATE

SECTOR ROLE 1. Bulgaria Bulgarian Energy Eiciency Fund 2004-present Energy eiciency/ buildings

Assembly of Donors: Governments of Bulgaria and Austria, GEF, DZI Bank, Lukoil Bulgaria, Brunata Bulgaria, and Enemona.

Helping public organizations and small and medium enterprises overcome barriers to funding energy-eiciency (EE) projects.

In ive years, the project helped fund 112 projects totalling US$39 million and helped organize three energy service companies (ESCOs).

Funding from the government, donors (Austrian government, GEF, and private donors and investors). Over 66 per cent of fund capitalization leveraged through equity, lending and guarantees. Private companies participate in fund management.

2. Cape Verde

Cabeólica Wind Farm Project

2009–present

Renewable energy

PPP: Ministries of Tourism and Finance, InfraCo Ltd, Electra SARL, Africa Finance Corporation (AFC), Finnish Fund for Industrial Cooperation Ltd.

Expanding the domestic electricity grid by adding renewable energy (RE) capacity. Awarded as the best RE project in Africa.

The project produces 25 per cent of wind power in Cape Verde annually.

Approximate cost: US$84 million. Equity inance from the PPP participants, debt from the European Investment Bank (EIB) and the African Development Bank (AfDB), political risk insurance from the Multilateral Investment Guarantee Agency. Private stakeholders act both as equity investors/lenders and as energy oftakers. 3. Croatia Croatian Energy Eiciency Project 2003–2010 Energy eiciency/ buildings

National energy utility: Hrvatska Elektroprivreda (HEP) Funders: International Bank for Reconstruction and Development (IBRD), GEF, the Croatian Bank for Reconstruction and Development (HBOR), commercial banks.

Encouraging a private EE services market.

As a result of the project, 31 EE projects were implemented with a total value of almost US$30 million.

Estimated cost: US$33.3 million. Seed funding from the government and international stakeholders, co-funding from private investors. Leverage factor for seed funding: 1.8, mostly in private funding. 4. Mexico Sustainable Housing NAMA 2011–present Energy eiciency/ buildings

Government: NAMA Fund, Mexico’s National Housing Commission (CONAVI) International stakeholders: GIZ Funders of the EcoCasa pilot program: the Mexican Federal Mortgage Society (SHF), Clean Technology Fund (CTF), Inter-American Development Bank (IDB), KfW, Latin America Investment Facility (LAIF), NAMA facility.

Building EE housing units using three diferent eco-standards thus expanding the green housing market.

The SHF EcoCasa pilot program alone will develop over 27,000 EE homes by 2020. Overall, the NAMA will potentially build up to 7 million EE housing units by 2020.

The total cost of the NAMA will depend on the variable costs of construction. Estimated cost of the SHF-EcoCasa pilot project is about US$230 million (including construction, green mortgages and technical assistance funded by the government and international stakeholders). Private investment potential exists through investor-tailored packages. 5. Morocco Ouarzazate Concentrated Solar Power Project 2012–present Renewable energy

Government, the Moroccan Solar Energy Agency (MASEN), the Moroccan Oice National de l’Eau et de l’Electricité (ONEE) Developer: ACWA Power Funders: IBRD, EIB, AFD, KfW, AfDB.

Addressing inancial and technical barriers to scaling up solar energy deployment.

The project can potentially contribute 1.5 per cent to Morocco’s energy mix by 2020.

Project cost: US$1,370 million. Equity inance from the government and the private developer, concessional loans from international stakeholders, market-rate loans from commercial banks.

COUNTRY/ PROJECT NAME/ START AND

END DATES

SECTOR/TYPE ACTORS CONTRIBUTION SCALE FUNDING ARRANGEMENTS/PRIVATE _{SECTOR ROLE}

6. Philippines Philippine Water Revolving Fund 2008–present Infrastructure transformation Philippines government, Development Bank of the Philippines (DBP) Donors: U.S. Agency for International Development (USAID), Japan Bank for International Cooperation (JBIC), private inancial institutions.

Creating a market for water services and improving the quality of management of water services and infrastructure.

The fund has supported 22 projects with a total loan value of US$102 million.

Funding from JBIC and private inancial institutions. Guarantees are provided by USAID and the Philippine government. Of all funded projects, 64 per cent were funded entirely from private inance.

7. Tunisia

Prosol Program 2005–present

Renewable energy

Ministry of Industry, National Agency for Energy Conservation Funders: Italian Ministry for the Environment, UNEP, the Mediterranean Renewable Energy Centre (MEDREC), Amen Bank, Tunisian Commercial and Industrial Banking Union (UBCI), Attijari Bank, Tunisian National Bank.

Overcoming insuicient demand for solar energy in a comprehensive manner through measures aimed at consumers, lenders and suppliers.

In ive years, Prosol attracted US$134 million in investments and helped install about 119,000 solar water heating systems ensuring a net gain for the public budget.

Estimated cost: US$134 million. Funders included the government, bilateral and multilateral stakeholders, and commercial banks. Of the estimated investment, 82 per cent came from private sources.

8. U.K. Walney Ofshore Windfarms (WOW) Project 2011–present Renewable energy

DONG Energy, Scottish Southern Energy Investors: OPW HoldCo, Blue Transmission Walney I.

Addressing policy and inancial barriers to investment in ofshore wind.

Currently the largest ofshore wind farm in the world with potential generation of up to 1,326 gigawatt hours annually.

Estimated cost: US$1.98 billion. Co-owned by utilities investors (over 75 per cent) and a inancial investor. Transmission lines are owned by an energy transmission company. The government awards leases and issues permits and carbon credits.

3.1

Implementing Entities

As Table 5 demonstrates, all eight case studies have central entities that manage the initiatives and/or accumulate relevant inances. In most cases such entities had to be established for the purpose of those initiatives, while in some cases this role is played by existing public entities. Generally, establishing a separate body for implementation of a program or project can be justiied from several standpoints. An entity such as the Mexican NAMA Fund may allow collecting and disbursing project funds in a centralized fashion rather than through multiple agencies, while a special purpose vehicle (SPV) such as Cape Verde’s Cabeólica SA may help project investors limit their liability; and in case of an ESCO, it may allow investors to accumulate energy service provision and relevant expertise. At the same time, the experience of Tunisia’s Prosol demonstrates that a complex program can be implemented through existing entities to ensure eiciency and facilitate revenue collection.

TABLE 5: IMPLEMENTING ENTITIES

PROJECT IMPLEMENTING ENTITY COMMENTS

Bulgarian Energy Eiciency Fund (BEEF)

The fund can accumulate and disburse funds, provide guarantees and consultations.

Coordinated by a multisectoral Assembly of Donors.

Cabeólica Wind Farm Project, Cape Verde

SPV Cabeólica SA is a project-oriented company that facilitates funding arrangements.

Co-owned by public and private stakeholders.

Croatian Energy Eiciency Project

HEP ESCO inanced and implemented EE projects. Managed by a state energy

company. Sustainable Housing NAMA,

Mexico

The NAMA fund will create the technical guidelines, inancial structures, and reporting infrastructure needed to attract and leverage additional funding. SHF will channel funds to developers and inancial intermediaries to inance EE homes in the NAMA framework.

Initially coordinated by Mexico’s National Housing Commission.

Ouarzazate Concentrated Solar Power Project, Morocco

SPV Solar Power Company provides the government with revenues from energy sale and infrastructure utilization.

Co-owned by the state and the project’s private developer. Philippine Water Revolving Fund

(PWRF)

PWRF accumulates funds and acts as a lender, creditor and credit enhancer.

Administered by the country’s development bank.

Prosol Program, Tunisia The program is an instrument channelling funds from

donors and lenders to end users through existing vehicles.

The program is directly implemented by the state utility company.

WOW Project, U.K. WOW Ltd. is an SPV that generates and trades power

and carbon credits.

The SPV is co-owned by several utilities and inancial investors.

Overall, the case studies demonstrate that national energy utilities, state banks and other relevant agencies in developing countries actively participate in climate change mitigation and infrastructure creation or transformation initiatives, accumulating experience in the process. In many countries where such initiatives have been implemented, these facilities already possess signiicant experience working with the private sector and leveraging private sector funding. Sometimes, as in the case of Prosol, state facilities may be uniquely positioned to facilitate project implementation because they are able to collect loan repayments alongside other payments that they receive from end users as part of their routine work.

3.2 Ownership

For the purposes of this report, ownership refers to the role that various stakeholders, in particular the private sector, play in establishing and implementing each of the eight initiatives. Table 6 shows that ive of the eight cases are PPPs; in addition, in three of the eight cases, the private sector is not among the “owners,” and its role is generally less signiicant compared to the public sector.

TABLE 6: OWNERSHIP

PROJECT OWNERSHIP

BEEF Directed by an Assembly of Donors that includes representatives of the major funders: the

Governments of Bulgaria and Austria, GEF, and domestic private investors (DZI Bank, Lukoil Bulgaria, Brunata Bulgaria, and Enemona).

Cabeólica Wind Farm Project, Cape Verde

Established by ive major shareholders: the Government of Cape Verde (Ministries of Tourism, Industry and Energy, and of Finance), InfraCo Limited (an infrastructure development company), Electra SARL (the national power utility), AFC and the Finnish Fund for Industrial Cooperation Ltd.

Croatian Energy Eiciency Project

Established as a partnership between an ESCO run by the national energy utility HEP, HBOR, the end users (users of electricity and heat, including owners and occupants of buildings of diferent types) and commercial banks.

Sustainable Housing NAMA, Mexico

Established by the national government with technical assistance from a bilateral stakeholder (GIZ) and with no private ownership.

Ouarzazate Concentrated Solar Power Project, Morocco

Co-owned by the MASEN (25 per cent) and a private developer, Saudi Arabia’s ACWA Power (75 per cent).

Philippine Water Revolving Fund Trilateral efort of the Philippine Government, the USAID Philippine Mission and the JBIC.

Prosol Program, Tunisia Organized by the Tunisian Ministry of Industry, Energy and Small and Middle Size

Enterprises, the National Agency for Energy Conservation of Tunisia (ANME), and UNEP.

WOW Project, U.K. Co-owned by private utilities and investor groups: DONG Energy, a Danish energy group,

has a 50.1 per cent stake, and Scottish Southern Energy’s subsidiary holds 25.1 per cent. OPW HoldCo U.K. Ltd., a joint venture of the Ampère Equity Fund (managed by Triodos Bank) and PGGM, a Dutch pension fund administrator, has 24.8 per cent.

Initiatives like Ouarzazate Concentrated Solar Power (CSP) demonstrate the advantages of a PPP in the conditions of a developing market with its high capital costs: the public sector is responsible for the quality and quantity of the project’s output, while the private sector provides management, inances and technologies (Falconer & Frisari, 2012, p. 21). At the same time, Mexico’s NAMA or the Philippine Water Revolving Fund were designed by the government with support from international stakeholders. The experience of these initiatives demonstrates that even in the absence of formal PPPs governments may beneit from the knowledge and skills of international organizations and development cooperation agencies that already have signiicant experience in working with the private sector.

3.3

National Governments, Agencies and State Banks

Table 7 demonstrates that the role of government funding and/or policy support, especially in countries with developing capital markets, is important for a project or program’s success. Case study analysis shows that governments may fund projects or programs, provide regulatory and policy support (for example, by adopting renewable energy targets or carbon credits), help secure revenues and attract investments through power purchase agreements or sovereign credit guarantees, or participate in project or program management. While government funding sends an important signal to potential investors, it may be argued that a combination of funding and guarantees creates an even stronger efect and improves a project’s attractiveness. For example, the Moroccan government’s inancial support to the Ouarzazate

• A PWRF Special Fund earns interest and serves the purpose of capturing re-lows of principal payments on the loan and reinancing existing or issuing new loans. The interest is collected into a sinking fund for future amortization of the JBIC loan.

• Further risk mitigation is achieved through a credit rating system to assess economic, political, management, technical and inancial status of the borrowers and to help them improve their credit scores.

• To increase lenders’ awareness of water projects, a Water Project Appraisal Training program was designed and organized throughout the country enabling inancial institutions to evaluate technical, institutional and inancial aspects of water projects. As a result, a Water Supply Project Appraisal Guidebook for Investors and Decision Makers was released.

Success factors:

• The LGU portion of the PWRF loans satisies the Agri-Agra Reform Credit Act of 2009 provision that PFI must lend 25 per cent of their loan portfolio to participants in agrarian reforms, making the PFI portion of the laws eligible as well. This will increase the private sector’s motivation to lend to water projects.

Challenges:

• Full inancing of water projects by the private sector is currently not feasible in the Philippines (commercial loans are provided at 12–13 per cent with 7–10 year tenure), that is why PWRF utilized the blended inance option.

• The fund has the potential for introducing asset-backed securitization to increase its capital (through engaging insurance and mutual funds and debt issuance), but this would require a more mature market.

Lessons learned:

Prosol (Tunisia)

Based on Baccouche (2014) and Trabacchi et al. (2012)

Launched in: 2005

Total budget: US$134 million Background:

The program is a inancing facility aimed at addressing barriers to increased demand for sustainable solar water heating (SWH) products. The barriers include high capital costs and long payback periods. The program addresses them through subsidies to lower-end users, facilitating consumer credit, organizing awareness campaigns about the beneits of SWH, building the capacity of inancial institutions and technology providers, providing accreditations for SWH product suppliers and installers to ensure quality, and developing CDM credits to support future funding. During 2005–2010, the program facilitated the installation of over 119,000 SWH systems, representing a 500 per cent

increase in annual deployment. The number of local SWH system producers has increased from nine to 45 in the course of the program. Three commercial banks have provided US$60 million in loans in the course of the project, earning US$7.4 million in the process. Estimated lifetime savings from SWH amount to US$101 million, and the government expects to receive full payback on its investment in 7 years.

Implementing mechanism:

Prosol was organized by the Tunisian Ministry of Industry, Energy and Small and Middle Size Enterprises; the National Agency for Energy Conservation of Tunisia (ANME); and UNEP. A broad range of public and private stakeholders have participated in the program, including: the Italian Ministry for the Environment and Protection of Land and Sea (MATTM); UNEP Division of Technology, Industry and Economics; Regional Centre for training, knowledge sharing and the development of renewable energy pilot projects in the Mediterranean Region (MEDREC); Tunisian National Bank (STB); commercial banks that acted as loan underwriters (Amen Bank, Union Bancaire pour le Commerce et l’Industrie and Attijari Bank); as well as homeowners and SWH manufacturers, importers and installers.

Financing arrangements:

• The program is split into a supplier-lending phase (encouraging supply) and a consumer-lending phase (encouraging demand).

• In the supplier-lending phase Prosol received a seed grant of US$2.2 million from MATTM. The grant consisted of a US$1 million subsidy (20 per cent) for SWH capital costs channelled through the Mediterranean Renewable Energy Centre; a US$1 million temporary interest rate subsidy channelled through UNEP to boost credit demand; and a US$200,000 for program support. Two commercial banks, Amen Bank and Union Bancaire pour le Commerce et l’Industrie, provided US$7.3 million worth of loans. In the consumer-lending phase, the

Equipment suppliers and

installers

STEG Subsidies: UNEP Government of Finance:

Tunisia

Market loans: commercial banks

End-users: households Tunisia National Bank

(STB) Concessional finance: Government of Italy (through MEDREC)

Success factors:

• To boost the market for renewable energy in Tunisia, in 2006 the government provided a value-added tax exemption and reduced custom duties for SWH systems, and has created an ad hoc National Fund for Energy Conservation channelling government funding to energy initiatives.

• A strong risk-allocation framework included handling policy risks by the government agencies and public international partners; handling procurement and technology risks by relevant public (standards) and private (installation and maintenance) stakeholders; handling inancial risks by STEG; and handling Certiied Emission Reductions-related risks by the public sector through an Emissions Reduction Purchase Agreement with the buyer.

• Incentives for participating banks included the program’s near zero default rate facilitated through risk mitigation measures that included working with the banks to mitigate their risk, which resulted in cheaper and longer-term credit for consumers that facilitated market development, and reducing the burden on banks by involving STEG with its high capacity to perform loan checks, do all necessary paperwork and collect repayments as the national utility service.

• Afordable credit was provided to consumers through soft interest rates (6.3 per cent compared to 9.7 per cent for generic consumer loans) and longer-term loans.

• By reducing the costs of SWH energy to consumers, Prosol inluenced their investment behaviour.

Challenges:

• The Tunisian government’s recent (2006) banking regulations have tightened loan provision rules, which has likely increased banks’ aversion to risk.

• Engaging suppliers as loan guarantors in phase 1 of Prosol proved risky—as small and medium enterprises, these companies have limited debt absorption capacity.

• Excessive reliance on one bank (Attijari Bank) for loan provision in phase two may have decreased the program’s sustainability.

• Planned scale-up of Prosol would lead to an increase in loans to US$92.5 million, and the banks will be able to generate up to US$1.5 million to $1.7 million in interest payments annually. These prospects, however, may not be inancially attractive to commercial banks, and the issue of scalability will need to be addressed.

Lessons learned:

• A comprehensive program like Prosol can have the following beneits for diferent stakeholders: - For the government: savings on energy subsidies

- For inancial institutions: creation of a large, high-quality credit market - For suppliers: increased visibility and large market

- For consumers: obtaining access to inexpensive hot water services, which is relected in an 87 per cent consumer satisfaction rate for SWH installments.

Walney Ofshore Windfarms (WOW) (U.K.) Based on Dong Energy (n. d.); Green Investment Bank (n. d.);Hervé-Mignucci (2012)

Launched in: 2011

Total budget: US$1.98 billion

Objectives:

WOW is a 367.2 MW ofshore wind park in the U.K. that includes two farms, Walney 1 and Walney 2, with possibility of extension. The project’s ofshore location was associated with a number of risks, therefore inancial institutions were initially reluctant to inance it. It uses a combination of policy and inancial incentives to address barriers to investment in renewable energy.

Implementing mechanism:

WOW involves six groups of stakeholders, including:

- Utilities investors: the DONG Energy group, a Danish energy group, has a 50.1 per cent stake in the project through its U.K. subsidiary DONG Energy Power (DEPUK), and Scottish Southern Energy whose renewables subsidiary, Scottish Southern Energy Renewables, holds 25.1 per cent of the project.

- Financial investors: the OPW HoldCo UK Ltd. joint venture (Ampère Equity Fund, managed by Triodos Bank, and PGGM, a Dutch pension fund administrator) has a 24.8 per cent share in the project.

- Investors in the transmission lines: Blue Transmission Walney I (Barclays Integrated Infrastructure Fund and Macquarie Capital Group) purchased the project’s transmission lines through a competitive bidding process, after which Macquarie’s share was purchased by Mitsubishi Corp.

- U.K. public structures: the Crown Estate awards seabed leases, the U.K. Department of Energy and Climate Change and the Oice of Gas and Electricity Markets (Ofgem) issue permits for constructions and Renewable Obligation Certiicates (ROCs), the Treasury is responsible for carbon taxes, and U.K. Revenue & Customs is responsible for overall taxes.

- Technology and services providers: DONG Energy’s network of contractors, including Siemens, a turbine equipment provider.

- Beneiciaries: the project may trade power and ROCs through PPAs, through the marketplace, over-the-counter brokers and regional energy companies.

Financing arrangements:

• The investors inanced WOW Ltd. on their balance sheets. Equity contribution amounted to GBP1,235 million, which corresponds to the investment costs of the project. This investment included:

Taxes Taxes Utilities: DONG Energy, SSE End-users: wind power traders Transmission: Blue Transmission Walney Offshore Wind Ltd. UK Government Investors: OPW Hold Co Ltd.

• In addition to private funding, the U.K. government contributed energy revenue incentives in the range of GBP1.3 billion to GBP1.5 billion.

• As a result, the share of public/private investment in the project is approximately 1:1.

• Project revenue comes from generated power (an expected GBP69 million annually) and from clean energy generation beneits. These beneits include ROCs (an expected GBP104 million to GBP127 million annually) and Climate Change Levy Exemption Certiicates and Renewable Energy Guarantees of Origin—an expected GBP 5 million to GBP7 million annually. Considering price volatility, the 15-year ixed-price PPAs between the SPV and its three shareholders mitigate price risk.

• Expected internal rate of return is 7.7–10.0 per cent.

Success factors:

• Risk mitigation frameworks are important to the project’s success. Overall risk allocation is as follows: - DONG Energy is exposed to the risks related to technical expertise and energy commodity trading. - Scottish Southern Energy is exposed to power and beneit-price-related risks.

- OPW is exposed to cash-low related risks.

- The U.K. government is exposed to three main risks: insuicient wind turbine deployment capacity, excessive wind power prices and insuicient emission reductions in the course of the project.

• Given that project revenue largely depends on ROC prices (over 60 per cent of the expected revenue), price risks for ROC were addressed through the following measures: when DONG Energy was the sole shareholder, it mitigated risk by using a mix of forward transactions, derivatives contracts, and PPAs with third-party oftakers; later, two sets of PPAs were developed: the ixed-price PPA, which regulates each shareholder’s purchase of their share of power generation and beneits, and the investor PPA between DONG Energy and OPW HoldCo Ltd.

Challenges:

• Scalability of the project may be conditional upon the level of complexity of its inancial model, policy sustainability, and liquidity and other inancial risks identiied.

Lessons learned:

• Investors that may be interested in ofshore wind projects include insurance companies, high-net-worth individuals and institutional investors. WOW inancing schemes were innovative for the U.K. ofshore wind sector and will help increase inancial institutions’ appetite for providing equity and debt to wind projects. • The opportunity of utilizing ROCs (green tradable certiicates) over 20 years is crucial for revenue generation

Published by the International Institute for Sustainable Development.

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